Here’s a short lesson on the difference between buying a bank owned property and buying a short sale. In today’s market the number of both available has dropped slightly, but there are still plenty of opportunities if you know where to look.
Bank Owned Properties (REO)
The property is owned by a local bank or a national mortgage servicer ( from hereon I’ll use the term Bank). All negotiations are made between a Buyer and an employee of the bank (as opposed to a homeowner). REO properties are almost always vacant and utilities may be turned off.
Standard offers to purchase are used in addition to the required Bank’s addends and disclosures. Consideration ($) will need to be in the form of a cashier’s check (no personal checks). Proof of funds for the down payment and a current loan pre-approval for the balance will also need to accompany an offer. Offers must be complete, correct and filled out according to the bank’s requirements. Do not submit offers that are not in compliance, they will be rejected by the bank or delayed until corrected regardless of the price being offered.
Your opinion of value and the Bank’s may differ, but before a Bank forecloses they have at least one local broker provide an opinion of value. Once they decide to sell the property, they have their listing broker determine if the opinion of value is still correct. The Bank is almost always pricing near market and is expecting to sell the property close to the asking price. Your Buyer’s Agent will give you a comparable market analysis (CMA) for the property prior to your making an offer. If you both feel that the asking price is well over market you should provide that CMA to the listing broker along with the offer. The lender has no obligation to see your CMA and frankly, they don’t care anyway. But if your CMA includes recent sales or similar properties that might not have been included in the original opinion of value, a strong listing broker just might be able to make your case to the Bank.
You may receive an answer within hours or it may take up to a week, but the response time should be fairly quick. Don’t get impatient with the listing broker, they do not have any control over the response time no matter what time frame you put in the offer for acceptance. The best approach is to ask the listing broker for an approximate length of time needed for response and use that in your offer. If the offer is for less then the asking price do not be surprised if the response is an outright rejection or a “best and final” counter offer. Banks are not in the business of owning properties, they are in the business of lending money, but any decision they make will be strictly business. If the offer is a solid offer (close to asking price with minimal contingencies and quick closing date) it may get accepted without a counter.
If your offer is accepted it is unlikely that the Bank will make repairs so an “as-is” sale should be assumed, and you should look the property over very thoroughly before you make an offer. If a few repairs need to be made to facilitate FHA or Conventional financing the Bank might be willing to make them so don’t be afraid to ask, but support any request with a hard quote from a licensed tradesman. If the house is a fixer-upper or a tear-down or in poor condition, (in today’s market ) traditional lenders probably will not lend on the property, so don’t waste your time submitting an offer using an FHA (95-97%) loan. Also, many banks are beginning to have penalties for closings that run beyond the set date so make sure your lender can perform in that time frame and that you do nothing to hold them up.
In summary, REO property sales are very much like conventional sales, just remember you are negotiating with a disinterested 3rd party, not a traditional homeowner, and that any deal you make will be “just business”.
With short sales the property is owned by a homeowner and the house may be occupied by an owner/tenant or it may be vacant. The owner is “under-water”, the sales price less closing costs is less than the debt(s) on the property and any offer needs lender(s) approval even though the lender(s) might not even know that the property is for sale.
A standard offer to purchase is used, which should include an addendum acknowledging and accepting the fact that this is a short-sale transaction and requires 3rd party approval. Consideration ($) can be a personal check and a current loan pre-approval for the balance will also need to accompany an offer.
Unlike a Bank owned REO, the listing price for the property may be based on something other than facts. The seller might be pricing it low to encourage multiple offers. They might be pricing it high to try to recoup as much money as possible. In rare cases it might be priced correctly. Unless the listing broker tells you they have an “approved” short sale (and even if they do it might be “stale” and will need to be updated at the time of your offer), the lender has not approved a sale at the list price so a Buyer doesn’t know if his offer even at list price will be accepted. Again, your Buyer’s Agent will produce a CMA market analysis to determine the value of the home before you make an offer. It is always good to submit this with your offer because even though the listing price may be based on something other than facts your offer should be based completely on facts. Closings can occur within 30 days but the 30 day clock will not start until the lender gives their approval.
In the beginning, your offer is handled like it would in a non-short-sale situation. The listing broker will present it to the seller and they approve it. It will then be forwarded on to the lender for their approval at which point the listing broker and the Buyer have no control over the process and is in a “wait and see” mode. This approval process may take one week or it may take up to three months. One very important thing to keep in mind is that while you are waiting for an approval of your offer another department of the Bank is working on the foreclosure and may actually foreclose on the property even though there are offers in for approval. If that happens, your deal is dead and the listing contract is terminated as the former seller is no longer the owner of the property and does not have authority to sell. If that happens and you are (still) interested in purchasing the property, you should work with your Buyer’s Agent to follow-up on the property when it comes back on the market as a REO.
Again, an “as is” sales should be assumed, but there may be a little more wiggle room than with a REO. Also, while it might be nice to have repairs made, the seller most likely won’t have the resources to make them and their lender is very unlikely to do so since they don’t own the property, so when you look at the property you should look it over very thoroughly before you make your offer and take into account any obviously needed repairs.
In summary, short sales are not at all like conventional sales, you are dealing with a broke seller, an uncaring bank, and probably a neglected property so you should wade into this swamp slowly and carefully and assume the worst – it probably will happen.